Report: Google plans venture capital group, but why?

Google has put money into a variety of startups through its Google.org …

Due to its success in the online ad and search market, Google has amassed nearly $13 billion in cash. So far, this hoard has mostly been used for the purchase of startup companies that are eventually assimilated into the Google Borg. But the search giant has also set up a foundation, Google.org, that (among other activities) invests in companies that are pursuing goals that the Google founders deem worthwhile. Apparently, the company has liked the investment approach enough that it's now considering creating an in-house venture capital effort.

The Wall Street Journalis reporting that planning for a venture capital group is already under way. The group will apparently be run by Google's chief legal officer, David Drummond, who apparently has time to kill when he's not testifying before Congress. The Journal reports that a former entrepreneur and private investor named William Maris will be brought on board for his expertise.

It's not entirely clear what Google hopes to accomplish through an investment arm. Although the economy is a major worry at the moment, there has been little indication that this has had a damaging impact on the venture capital markets. As such, it's not clear that there is a desperate need for Google's billions to float new ventures. The converse, of course, is that the investments might pay off for Google, but the company doesn't seem to need help in that regard, either.

One alternate explanation is that Google seeks to influence the development of new markets and technologies through its choice of investments. It's possible that they'll structure the investments such that they have the option of buying the company outright should things work out.

This approach would entail a number of risks, however. Google is already being accused of having a monopoly on search by its competitors, and investments that seek to influence the development of this market would inevitably end up presented as evidence of monopolistic abuses. Meanwhile, startups might be leery of accepting investments from Google if they felt there were strings attached. Those behind new ventures will want to know that they can pursue anything that makes sense financially and technologically, rather than feeling they are restricted to chasing only those markets that Google thinks are appropriate or working with an eventual buyout by the search giant in mind.

The Journal notes that Google would join a significant list of technology companies, including Intel and Motorola, should it open an in-house investment group. It describes the experience of these other companies as mixed, and notes that their investments account for a shrinking slice of the venture capital pie. All of this makes the decision by Google that much more puzzling, as the company tends to avoid entering shrinking markets.